<<<	articles
A Chou En Lai verdict on Gordon Brown Samuel Brittan The Financial Times 22/07/05 Is Gordon Brown's supposed economic miracle based on sand? Those who have always thought so will find their suspicions reinforced by the Treasury's redating of the economic cycle and the one year postponement of the public expenditure review. In fact such a postponement will enable expenditure decisions to be taken with a better view of revenue prospects and should therefore appeal to sound finance warriors. I have never set much store on Brown's first golden rule, balancing the current budget over an economic cycle. This depends far too much both on locating where we are in the cycle and on the current capital distinction which makes little sense for much public spending. A stock example is that school lavatories are capital spending; more money for science teachers is current spending. The second golden rule that government net debt should not exceed 40 per cent of GDP makes more sense in the long run, although it is not one that should be followed at all costs and irrespective of circumstances. This ceiling may be reached in 2006 according to the OECD, partly as a result of new rules for recording private-public partnerships. Even so British fiscal indebtedness is far lower than that of Japan, the eurozone and the US. It would be much easier if Mr. Brown had not set so much store on supposedly scientific techniques which purport to tell him how much spare capacity there is in the economy. The new Treasury paper on defining the business cycle has attracted attention because it adds two good years in the late 1990s to the period over which the chancellor should seek a balance. Less notice has been given to the fact that the revisions suggest that the economy entered the present slowdown with almost none of the "output gap" that the Treasury had earlier on asserted existed. The July MPC minutes show that the technocrat members are itching to begin reducing interest rates. But we should not get bogged down debating how much the economy is slowing down. Some while ago I urged caution on this front because of the need to leave room in the economy for any improvement in the export-import balance that might occur. The argument went unheeded, as the balance of payments is just as unfashionable now as it was an overpowering obsession in most of the post-war decades. Obviously a time could come when there is sufficient slack in the economy on any basis and some stimulus might be in order. The question is whether there would be any obstacles to administering an adequate dose. The real argument here is not between right and left but between the prevailing school of macroeconomists who think in terms of output gaps and small adjustments in central bank interest rates, and those in the financial community who are afraid that we are already awash in a sea of money and credit. Few observers have noticed the much needed rebalancing of the economy is beginning to happen. The rise in consumer spending, which was the growth leader in the first five years of the Labour government has fallen back from an annual average of 4.3 pc then to 2.6 pc in the three years to the first quarter of 2005, to just over 2½ per cent per annum, the slowest growing of any component of GDP except exports. If we look at nominal growth - that is spending in actual money not corrected for inflation - the rebalancing emerges even more strongly. The discrepancy between export and import growth is then less, which suggests that the government - or rather the country - still enjoys the luck of improving terms of trade. There are two main indictments of the Brown strategy.. One is that much of the growth in employment since 1997 has been in the public sector and that a large proportion of this has been in administrators rather than frontline medical or teaching personnel. There is argument about these statistics, which are frequently redefined. But I would not argue with that general impression. It is noticeable that the deflator - that is rate of price increase - for government consumption has averaged over 5 per cent compared with a 1.5 pc average rise in the official Consumer Price Index. Even these facts can be given varying political twists. While Conservative critics say that the growth is not genuine, there are those on the left of the government who say that nearly all the employment growth since 1997 has been due to old fashioned policies of tax and spend rather than New Labour welfare to work measures, let alone Margaret Thatcher's earlier trade union reforms. In any case disagreement with Brown's political priorities should not cloud the macroeconomic analysis. If voters want a rapid increase in public services over a short period they have experienced it in the only way possible. And should a market economist be surprised if there is a relative increase in the wages of public sector workers in the face of a rapidly rising demand for their services? The other indictment of the Brown strategy cannot be dismissed so easily. Broad money and credit aggregates have been increasing at low double digit rates. Even more telling is the estimate of the Bank for International Settlements that mortgage lending has surged by a cumulative 160 pc in the last five years, far faster than elsewhere - although the US is rapidly catching up in the housing boom stakes. One is led to ask what kind of economic stimulus could be given which would not add to the debt burden? Interest rate cuts might help rebalance the economy further if they led to a sterling depreciation. But on the domestic side they would work by rekindling the consumer borrowing and the house price boom, or at the very least cancelling some of the healthy correctives administered by earlier interest rate increases. How a bout a fiscal stimulus? In the last resort the old Keynesian cry (never fully accepted by Lord Keynes himself) that we "owe the national debt to ourselves" is justified if Government borrowing can be sustained without stoking up inflation and if the borrowing is domestic. If however it comes from non-sterling sources then there is a clear chance of creating a bubble, which will sooner or later burst. The US is more obviously in this situation than the UK, but is better placed to withstand a currency shock. It is all a matter of degree. A 10 to 20 per cent fall in sterling could help in rebalancing the economy; and the Bank of England should look back at the astonishingly small inflationary impact that leaving the ERM had on British inflation before it rushes into restrictive action. A 30 or 40 per cent fall would be another matter. In the end the sustainability of the Brown miracle will depend on the behaviour of foreign owners of sterling, as the old Treasury hands could have told him. John Butler, of HSBC, has pointed out that the surprising strength of the pound over the last few years has reflected the overseas profits of oil companies which are counted as credits in the balance of payments even if they are not repatriated. That is one reason why the UK currency balance of payments deficit remains at on paper at a relatively modest 2 per cent of GDP compared with 6 per cent for the US. I hate to disappoint political commentators who would like an analysis in terms of Gordon Brown's personality quirks or his relationships with Tony Blair, but the verdict of history on the Brown experiment is likely to depend on unforeseeable international developments. To take but one example: too big a fall in the oil price would put British overseas earnings at risk, while too large a further rise could jeopardise the chancellor's inflation target. And I have had no space at all to discuss the interaction with the dollar. Thus my verdict on Gordon Brown is similar to Chou en Lai's verdict on the French Revolution: "It is far too early to say."
<<<	articles
Site designed and managed by Andrew Heavens - andrewheavens@ftnetwork.com